* Eurozone OK on bailout, as Sarris fights for deposits *
Finance Minister Michalis Sarris has warned that all the talk about a “bail-in” plan for a writedown of Cyprus bank deposits has spooked depositors, with January data suggesting that about 2 bln euros have already left the country.
Eurozone finance ministers agreed late on Monday on a bailout for Cyprus by the end of March, possibly for up to 17.5 bln euros, but failed to decide how the rescue will be financed.
Sarris told his counterparts in Brussels that a “bail-in” would be catastrophic for Cyprus and would jeopardise the sustainability of any bailout, as it would hurt efforts to recapitalise the island’s two main banks, despite pledges by President Nicos Anastassiades last week to work for a swift deal.
“There is no way we can entertain the idea of any kind of haircut to any kind of deposits,” he said. “That is our firm position and we have communicated that.”
“We do not wish to discuss anything unorthodox,” Sarris said. “This would be an accident in the euro zone not caused by markets, but a self-inflicted wound, a self-inflicted catastrophe, not only for Cyprus but for the euro zone and perhaps even beyond.”
Two euro zone officials said ministers meeting in Brussels on Monday did not agree on how best to finance the bailout, but were committed to a deal by the end of March.
"The Eurogroup called on the international institutions and Cyprus to accelerate their work on the building blocks of a programme, and agreed to target political endorsement of the programme around the second half of March," the ministers said in a statement.
Removing one of the stumbling blocs for a bailout agreement, the new government in Nicosia has agreed to an independent review of how Cypriot banks are implementing anti-money-laundering laws, the euro zone statement said.
Sarris said work on an independent evaluation of the country’s progress in enforcing legislation against money laundering could begin on March 12 and produce “essential” conclusions before the end of the month.
The review of Cyprus's money controls may be conducted by Moneyval, a committee of anti-money laundering experts backed by the 47-nation Council of Europe and one of the Big Four accounting firms, European officials said. The Cypriot government has been pushing for involvement by the central bank of Cyprus.
That is likely to appease Germany, which has raised concerns about money-laundering on the island, primarily concerning Russian depositors.
One way to ensure the Cyprus loan is sustainable is privatisation of state assets, starting with the state telecoms company Cyta, as suggested by Sarris, which could raise up to 1.5 bln euros. Germany’s hawkish Finance Minister, Wolfgang Schauble also wants Cyprus to consolidate the bloated banking sector, which has assets eight times larger than the island's 17 bln GDP.
German officials, backed by the Netherlands and Finland, have pushed for depositors in Cypriot banks, many of whom are Russian and British business people, to help pay for the cost of the rescue, a process known as a "bail-in".
There are concerns in Berlin that Cyprus, with its low corporate tax rate and liquid banking system, has become a conduit for money-laundering.
Figures released last week showed a little over 2% of total deposits was withdrawn in January, although officials say there has since been a return of capital. Sarris called the bail-in idea a bad proposal.
"Really and categorically – and this doesn't only apply in the case of Cyprus but for the world over and the euro zone – there really couldn't be a more stupid idea," he told reporters last week.
Other options to make a bailout viable include an extension of repayment for a loan from Russia and the possibility of Russia taking a controlling stake in Cyprus Popular Bank, one of the hardest hit by the Greek debt crisis that was nationalised with a 1.79 bln state rescue last year.
"SYSTEMICALLY IMPORTANT"
While short on detail, the euro zone statement at least ends a dispute over whether Cyprus is important enough for the euro zone to come to its rescue – a debate started by Germany, which had said the "systemic relevance" of Cyprus was unproven.
Olli Rehn, the European commissioner for economic affairs, said over the weekend all euro zone countries were important.
"Even if you come from a big EU country, you should be aware that every member of the euro zone is systemically relevant," Rehn was quoted as saying in Der Spiegel.
"If Cyprus becomes disorderly insolvent, it is very likely that would lead to it exiting the euro zone," he said.
A 17 bln-euro rescue would increase Cyprus's debts to around 145% of GDP, a level considered unsustainable. By comparison, Greece's bailout calls for it to cut its debt-to-GDP ratio to 120% by 2020, but that would be too high for Cyprus.
The IMF and other officials believe Cyprus should have to cut its debt-to-GDP ratio to just below 100%, but Cyprus is likely to push back against that, saying 120% is manageable.
The final decision on Cyprus is likely to come at an extraordinary meeting of the ministers later in March.
Cypriot EuroMP Takis Hadjigeorgiou was quick to respond, saying that comments by Dutch Finance Minister and Eurogroup chairman Jeroen Dijsselbloem and ECB Council member Benoit Coeure of a “bail-in” were baseless, accusing them of being responsible for the flight of 2 bln euros from Cyprus banks within a few days.
The Cyprus Investment Promotion Agency tried to take a reassuring stance saying that certain people within the EU keep on repeating the same old arguments, when they know there is no issue of a bail-in, as it would also jeopardise the whole European financial infrastructure.
